A Europe Tired of Cutbacks Has Few Alternatives

Citizens from Prague to Paris to Amsterdam have made it abundantly clear the last few days that they are tired of economic austerity forced on them by eurozone debt crisis. But as budget-cutting pain of reduced government benefits and social services brings protesters to the streets and drives support for nationalist or far-left parties, it is not clear what economic alternative might be. Rejecting austerity budgets in favor of more government spending will not automatically ensure economic growth. “The last thing these economies need is a debt-financed stimulus program,” said Jörg Krämer, chief economist of Commerzbank in Frankfurt. Governments in countries like Spain are having enough trouble financing their existing debt, much less coming up with money for stimulus spending. Germany, only large country in the eurozone with budgetary room to increase its deficit by spending more, is not willing to. (And neither was Netherlands, at least until its government collapsed Monday over a dispute that essentially involves the austerity vs. growth debate). Financial markets were down deeply and broadly in Europe Monday, on concerns over the backlash to austerity, and the sell-off carried over to United States markets. As more European countries teeter on edge of recession or slip into one, Spain on Monday was latest to slide, even policy-making elite has begun to question whether Germany and the European Central Bank have gone too far in insisting that fiscal discipline is a prerequisite to growth. Eurozone unity is under strain as other Europeans resent what they perceive as Germany’s holier-than-thou attitude in insisting that all countries in euro currency union keep their promises to reduce government budget deficits to 3 percent or less of gross domestic product. Germany’s government deficit was a modest 1 percent of gross domestic product at the end of 2011. “A global, undifferentiated rush to austerity will ultimately prove self-defeating,” Christine Lagarde, the president of the International Monetary Fund, said at the fund’s spring meeting in Washington on Saturday. But Ms. Lagarde also acknowledged the quandary facing European leaders. Most of them simply do not have the resources to pay for public works projects or social programs that would ease the pain of rising unemployment and declining wages. At the monetary fund meeting, Treasury Secretary Timothy F. Geithner continued his call for Europe to at least temporarily set aside budget cutting and engage in sort of government spending stimulus that the Obama administration prescribed for the American economy in 2009. (The United States, to the extent that it can continue getting away with its gaping budget deficit, relies on the world’s seemingly insatiable appetite for the Treasury bonds that finance the American debt and deficit) (…..)

Link: http://www.nytimes.com/2012/04/24/business/global/europe-caught-in-vise-as-austerity-weakens-economy.html?pagewanted=1&_r=1

Acerca de ignaciocovelo
Consultor Internacional

2 Responses to A Europe Tired of Cutbacks Has Few Alternatives

  1. Professor Uziel Nogueira says: The argument for postponing structural reforms in the euro zone goes like this. The Obama administration is engaged in public spending stimulus and monetary quantitative easing while running huge budget deficit. However, interest rates are set at historical lows and inflation is under control. The economy is growing, albeit unemployment remains in double digits. Thus, the euro zone (read, Ms. Merkel) SHOULD follow the US example and ease fiscal policy. The answer from Germany is NO. The European economists do not read in the same page as the American economists. The following statement in this piece is a good example: ” The United States, to the extent that it can continue getting away with its gaping budget deficit, relies on the world’s seemingly insatiable appetite for the Treasury bonds that finance the American debt and deficit.” Foreign investors finance the huge US deficits NOT because of their appetite for (low yields) Treasury bonds. They finance the twin deficits because of the DOLLAR, the main currency of reserve and transaction in the world. If the dollar collapses, the rest of the world will collapse. BRICS, particularly China, are trapped with billions of dollars and Treasury bonds in their central banks. The euro zone DOES NOT have the privilege of a world currency. The only solution for the debt crisis is (painful) economic reforms. Everything else is bogus policies and false hopes.

    http://www.nytimes.com/2012/04/24/business/global/europe-caught-in-vise-as-austerity-weakens-economy.html?pagewanted=1&_r=1

  2. Professor Uziel Nogueira says: “Citizens from Prague to Paris to Amsterdam have made it abundantly clear the last few days that they are TIRED of the economic AUSTERITY forced on them by the euro zone debt crisis.” says the NYT. The bad news is that reforms of the welfare state have not started yet. Where we go from here? Brazil — leading economy in Latin America — is a good case study. In the 1980s, the country was considered a ‘basket case’ due to public finance’s mismanagement and a wrong development approach of import substitution. It took a decade of painful structural reforms to increase productivity and improve macroeconomic management. The IMF played a key role on that successful outcome. Today, the Brazilian economy has reached the best of two worlds: sustainable growth/low inflation + jobs creation and income distribution. If Brazil (alone) could modernize its economy, the 27 EU member countries can surely do much better. They have financial/technical support from powerful and rich neighbors to undertake economic reforms. Besides, their citizens can move freely in the integrated area and seek jobs where they are available.


    The EU’s crisis has already moved from the debt crisis to the political system. The challenge is whether the EU’s political system can manage expectations among the electorate. Europeans got used to a generous welfare system. How far they will go to preserve it? The strength European democracy will surely be tested.

    http://www.nytimes.com/2012/04/24/business/global/europe-caught-in-vise-as-austerity-weakens-economy.html?_r=1

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